USD: Weak US capital spending has continued into Q3 - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the broad impact on the US dollar from the spike higher in the price of oil has been limited as the capital spending in the US particularly in the oil sector has been hit hard by the collapse in the price of oil.

Key Quotes

“The latest durable goods report released yesterday revealed that core shipments continued to contract in August signalling that capital investment has likely remained a drag on growth in Q3 for the fourth consecutive quarter. Heightened political uncertainty could be weighing on capital investment in the near-term. Economic growth is still expected to rebound solidly in Q3 driven by inventories and solid consumption growth. The Atlanta Fed’s latest Nowcast model is expecting growth of 2.8% in Q3. It follows weak growth in Q2 which is expected to be revised modestly higher today to 1.3%. 

However, there are encouraging signs that the outlook for capital spending is improving which was reinforced by the third consecutive monthly increase in core orders in August. The outlook for capital investment in the US would be improved further if the OPEC production cut supported a higher oil price and encouraged an increase in US oil production.

A higher oil price would also be supportive for the US inflation outlook potentially reinforcing the Fed’s confidence that it will return to their 2.0% target, and encouraging the Fed to continue gradually tightening monetary policy in the year ahead offering support for the US dollar. Current low inflation readings are allowing the Fed more time to hold off from rate hikes even as underlying inflation pressures are building. Fed Chair Yellen reiterated yesterday that the majority of the FOMC expect to resume rate hikes by year end.”